Assignment: Module 1

Direction: Read and analyze each statement carefully and answer the questions on the
space provided. Submit your output in the Discussion Board not later than Friday August
20, 2020. (Note: Instructions will be given re: groupings)
1. Ann spends Php30,000 per year on painting supplies and storage space. She recently
received two (2) job offers from a famous marketing firm – one offer was Php110,000
per year and the other was Php80,000 per year. However, she turned both jobs down to
continue a painting career. If Ann sells 25 painting per year at a price of Php8,000 each:
a. What are her accounting profits? 170,000

Total Sales Revenue ₱200,000.00

Explicit Cost
Painting Supplies
₱30,000.00
and Storage Space
Total Explicit Cost ₱30,000.00
Accounting Profit ₱170,000.00
AP = Total Sales Revenue – Explicit Cost
AP = Total Sales Revenue – Painting Supplies and Storage Space
AP = 200,000 - 30,000
AP = ₱ 170,000

b. What are her economic profits? 60,000

Total Sales
Revenue 200,000
Explicit Cost
Painting
Supplies and
Storage Space ₱30,000.00
Implicit Cost
Forgone wages ₱110,000.00
Opportunity Cost ₱140,000.00
Economic Profit ₱60,000.00
EP = Totas Sales Revenue - Opportunity Cost
Ep = Total Sales Revenue - (Painting Supplies and Storage Space + Forgone
Wages)
EP = 200,000 - (30,000 + 110,000)
EP = 200,000 - (140,000)
EP = ₱60,000

2. The manager of Tires Incorporated is contemplating the purchase of a new automated

machine that will cost Php300,000 and has a useful life of five years. The machine will
yield (year-end) cost reduction to Automated Products of (see table 1):
Year Amount
 1 50,000
2 60,000
3 75,000
4 90,000
5 90,000

a. What is the PV of the cost savings of the machine if the interest rate is 8%?
Year 1 Year 2 Year 3 Year 4 Year 5

₱46,296.30 ₱51,440.33 ₱59,537.42 ₱66,152.69 ₱61,252.49

Present Value of Cost Saving Machine ₱284,679.23

b. Should the manager purchase the machine? Yes or No?

No, it is not reasonable to purchase machine because it has lesser present value than
the market price of 300,000 and it differs ₱15,320.77.

3. Suppose the interest rate is 10% and GMA 7 is expected to grow at a rate of 5% for the
foreseeable future. The firm’s current profits are Php200 million.

a. What is the value of this TV station (the present value of its current and future
earnings)?

PV = Value of Firm

PV = 200,000,000
PV = ₱ 4,400,000,000 or ₱ 4.4
Billion

 
4. Lucio Tan, a well-known business magnate has outsourced a marketing research
specialist for his firm. The said specialist has estimated that his firm’s total revenues to
be:
R(Q) = 3,000Q – 8Q2 and his
total costs to be C(Q) = 100 + 2Q2. 
 a. What level of Q maximizes net benefits? Q=150
4Q = 3000 - 16Q
4Q + 16Q = 3000
20Q = 3000
Q = 150

b. What is marginal benefit at this level of Q? MB=600

MB = 3000 - 16(150)
MB = 3000 - 2400
MB = 600
c. What is marginal cost at this level of Q? MC=600
MC = 4(150)
MC = 600
d. What is the maximum level of net benefits?
MNB = 3000 (150) – 8(150^2) - 100 - 2(150^2)
MNB = 224, 900
e. What is another word for net benefits in this example?
Total Revenue

Additional questions
5. Suppose that the total benefit (TB) and total cost (TC) from a continuous activity are,
respectively given by the following equations: B(Q) = 100 + 36Q – 4Q² and C(Q) = 80
+ 12Q
[Note: MB(Q) = 36 – 8Q and MC(Q) = 12].

a. Write out the equation for the net benefits.

NB= 100 + 36Q – 4Q^2 – 80 + 12Q
b. What are the net benefits when Q = 1? Q = 5?
Q=1 100 + 36(1) – 4(1)^2 – 80 + 12(1) = 40
Q=5 100 + 36(5) – 4(5)^2 – 80 + 12(5) = 40
c. Write out the equation for the marginal net benefits.
MNB= 36 – 8Q - 12
d. What are the marginal net benefits when Q = 1? Q = 5?
Q=1 36 – 8(1) -12 = 16
Q=5 36 – 8(5) – 12 = -16
e. What level of Q maximizes net benefits? 3
36 – 8Q = 12
f. At the value of Q that maximizes net benefits, what is the value of the marginal net
benefits?
36 – 8 (3) – 12 = 0

6. An owner can lease her building for $120,000 per year for three years. The explicit cost
 of maintaining the building is $40,000 and the implicit cost is $55,000. All revenues are
received and costs borne, at the end of each year. If the interest rate is 5% determine the
present value of a stream of:
a. accounting profits
TSR 120,000
Explicit cost 40,000
Accounting Profit 80,000
AP= TSR – Explicit Cost
80000 80000 80,000
(1.05)^1 (1.05)^2 (1.05)^3
76190.48 72562.36 69107.01
PV=217859.85

b. economic profits
accounting profit 90,000
implicit cost 55,000
Economic Profit 25,000
EP= TSR – (Explicit – Implicit) or EP=Accounting Profit – Implicit Cost

25000 25000 25000

(1.05)^1 (1.05)^2 (1.05)^3
23809.52 22675.74 21595.94
PV=68,081.2